Swiss Franc Not A Safe Bet For East Europeans

The Swiss Franc Appreciation

The Swiss Franc “skyrockets” and becomes the heaviest burden for Eastern Europeans who have loans. In Hungary the local currency equivalent for a rate on a loan in Swiss francs rose by 60% from 2008 to now.

Instead of strengthening as Tamasi had hoped, the forint has fallen hitting a record low at 218.95 to the franc on Thursday, from 150 when Tamasi took the mortgage. His monthly payments have jumped from 70,000 forints to 110,000.

“I looked at my statement last month and nearly passed out,” he said.

“Our total remaining loan, which started at 13.6 million forints (£38,769), is now 16.5 million. And I’ve been paying my installments for almost two years.”

HUF The Hungarian Currency

The monthly rates Tamasi needs to pay have jumped from 70.000 HUF (244 euros) to 110.000 HUF (384 euros). And Tamasi is not the only in this situation. In Hungary, two thirds of the loans were denominated in foreign currencies in the first quarter and of these, over 34% were contracted in Swiss francs. The Problems could continue for Hungarians who took loans in the Swiss currency, given that the forint lost this year more than 22% of value against the franc.
Moreover, the situation in Hungary is the most dramatic because the forint reached a record low against the Swiss franc (220 HUF / 1 Franc). Most loans were contracted at the time when the parity was 140-160 HUF / 1 Franc.

In this country, the Swiss currency appreciation “will have massive implications on households, they will feel the first impact, “said in late August for The Wall Street Journal Luis Costa, strategist on Central and Eastern Europe at Citigroup. “But some of this impact will be felt by banks, too, they will be forced to increase provisions for bad loans”, according to Costa.

In Poland, the situation is not much different, given that 20% of all loans were denominated in francs in the first three months of the year and the zloty depreciated by over 10% in 2010. The Baltics have borrowed in foreign currency in recent years, but chose the U.S. dollar or euro. In Romania, only about 5% of loans are denominated in francs, while in Lithuania and in Estonia the share falls well below 1%, according to UBS Wealth Management Research. The Leu (RON), the Romanian currency, depreciated by just over 17% compared to the Swiss franc since the beginning of the year.

In the last decade, a number of companies and individuals outside of Switzerland, mainly in Austria and several Eastern states have contracted loans denominated in Swiss francs to finance various investments or personal needs.

Romanian Leu, RON

The total volume of loans denominated in Swiss francs, contracted by both the banking and non-banking sector increased from 228 billion Swiss francs in 1999 to 558 billion francs in the third quarter of 2008, before slightly declining to 488 billion francs (378 billion) in the first quarter of 2010, according to the report “Loans in francs could become a threat to Switzerland”, conducted by UBS Wealth Management Research. To properly assess their actual size it should be taken into account that the total volume of loans in Swiss francs is ten times the value of all Swiss francs banknotes in circulation and is almost equivalent to the nominal GDP of Switzerland (535 billion Swiss francs in 2009).

Small interest

Loans in Swiss francs have become attractive due to lower interest rates compared to interest rates practiced by loans contracted in other currency. Moreover, the Swiss currency depreciation between 2003 and 2007 also fueled a strong demand for loans in francs in Eastern Europe. Since June, however, the franc had a strong appreciation against almost all currencies, which means that the foreign currency denominated loans have, become increasingly expensive.
Largest holders of loans in Swiss francs are the Austrians, who “owe” 81 billion Swiss francs (62.7 billion euros), followed by Germany with loans of up to 60 billion francs. Outside the euro area, the Poles are leaders on the podium, with loans worth 53 billion francs, followed by Hungarians with loans worth 36 billion francs.

The appreciation of the franc
The Swiss are not very pleased with the franc appreciation and fear that this phenomenon will harm their economy. All the more now that analysts’ forecasts show that the Swiss franc could reach new heights against the euro in the coming months, says Thomson Reuters news agency. Euro depreciated by over 15% compared to the Swiss currency earlier this year, according Oanda.com.

Today the Euro-Swiss franc parity was 1.3225. “If the U.S. economy will slow down or a new financial crisis will unravel, everyone will rush to buy francs”; the currency became protective of market turmoil, according to David Bloom from HSBC‘s UK bank.

The central bank tried to intervene on the market in summer, spent 80 billion francs a month, but so far their actions have not had lasting impact. And while the number of investors placing capital in Switzerland is growing, Berne officials fear that the Swiss economy is too small to safely absorb massive capital inflows.11